Making money out of free

My father was a businessman for many years. He worked for the family business in Glasgow (an old-fashioned department store a bit like Grace Brothers), he managed other retail outlets and he started a couple of businesses. So he knows a thing or two about commerce. And being interested in business, he often asks about Unchained – but no matter how simply I try to explain, he just doesn’t get it. He respects it – but he doesn’t get it. And that’s because the business is based around the revenue model of ‘free’ – it’s free for people to search for shops on the site and it’s free for the shops to be listed. And he doesn’t understand where the money is in that. And he’s not the only one.

I meet a lot of entrepreneurs – especially tech entrepreneurs – and it seems that many of them just don’t get it either. A disturbingly high number of them are starting web businesses without a proper revenue model in place, presumably hoping that Google will throw a few million their way to buy them out. And I don’t think the world works that way any more – certainly not in this economic slump.

There are also some big businesses that are struggling with this freeconomic model. A number of newspapers have recently been talking about charging for some of their content again. LastFM announced yesterday that they’d be charging for streaming music in certain territories. And TechCrunch is regularly reporting on web businesses hitting the skids.

Free is clearly a problem.

So I decided to put my thoughts down on paper (that beautifully crafted diagram below) on how to make money out of giving stuff away for free on the web. And my thinking comes both from my perspective as a partner in the totally free Unchained and also as a marketing ponderer.

First off, let me summarise my doodle. In the middle we have the business (wth a Web 2.0 glass effect button, no less). On the left we have ways it can make money from customers and on the right how it can make money from other businesses. The first thing you’ll notice is that there are more options in the business camp. That’s because the freeconomy is all about making things free to end users – usually punters like you and me. The second thing you’ll notice is that I smudged the diagram when I got too excited drawing it. Sorry.

I’ll now go through each of the options and give a brief description of how they work. Pay attention at the back, Smithers.

Premium Version

This is a very popular model used by Flickr, Spotify – and soon Twitter. The basic version is free for everyone to use. But if you want a better experience, more power or less interruption, it’s all yours for a small fee. The secret is to make the free version awesome – and make the premium version awesomely awesome. If your free version is a dissappointingly cutdown version, you’ve lost your audience right away. This doesn’t include time limited trials because they’re not truly free.

Donations

You have to rely on a lot of goodwill here. This is how Wikipedia makes a bit of money. And lots of little open-source things. It really depends on having a loyal community.

Sell physical product

I know it doesn’t sound like free – but this is where the products you sell aren’t your product. Understand? Mozilla are the folks behind the Firefox browser – but they sell merchandise to help fund them. And Flickr also lets you do lots of physical stuff with your photos (Moo cards, books, credit cards). You can do this through affiliate deals – but I’ll come to that later.

Funding

OK this is the sneaky third section that isn’t about customers or businesses. It’s about getting money from other places to keep you going. Stuff like government grants or a private benefactor.

I suppose self funded projects would also fall into this camp. For example the Barbarian Group made the awesome Plainview full-screen browser, Poke NY do the Kideo Player and Charmin do sitorsquat. They’re projects done to generate awareness and goodwill – and in return attract business and increase profits.

Syndication

If you have content that no one else can offer, you have something valuable. Some businesses may be interested in paying you to use it. Before you take the money, make sure that it’s a good association for your brand. Partnering with the wrong company can destroy your brand image and lose you the users you’ve invested so much in attracting.

Advertising

The obvious one – put banners on your site. But let me tell you from a media owner’s experience, it probably won’t bring in enough money to sustain your business.

Sponsorship

If you’ve got decent traffic and attract the right kind of people, some brands may be interested in sponsoring your site. There is tricky balance to reach here. You’ll make more money by allowing more of the sponsor’s branding and messaging on your site – but if you allow too much you’ll alienate your audience. The web is well-known for turning its back on ‘sell-outs’. Be a sensitive lover not a whore.

Sell your data

What can you learn from your visitors? For example, if you’re offering reviews of solar powered cheese making kits, the models that get the most visits and get recommended most often will probably correlate with sales. This information would probably be valuable to the buying department of Solar-Powered-Cheese-Making-Kits-R-Us. Just a thought.

Sell access to your customers

You have a load of customers (or users) that you send a weekly newsletter to. If you attract a very particular type of person, there may be other brands that would pay to talk to them. You could offer them space in your newsletter. Or if some of your customers have stupidly ticked (or forgotten to untick) the little box that says ‘let lots of other corporate assholes spam me with their shit’ – you can sell their email addresses. I obviously don’t like this latter option!

Affiliate deals

There are lots of companies that will pay you a little royalty on every sale that comes through your site. Again, it’s wise to make sure there’s a sympathy with your brand and a reason to partner with these companies.

Do a business version of your product

There are some sites that only offer their stuff free to punters but business have to pay. This can come across as harsh if there’s no extra benefit. I think the better thing is to offer a pro version with features that businesses would want. So this kind of goes back to the premium model in the customer section. Businesspeople are people too and they’d also appreciate the nice rosy glow of knowing they’re getting some kind of value rather than being penalised.

Licensing

If you concentrate on building a brand that has affinity with you audience, your brand itself has a value. Some companies may be interested in paying you to sell things under your brand. That’s what Virgin do. Most Virgin companies are just paying Mr Branson for the right to use his big V sign.

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This has turned into a monster post and I’m trying to restrain myself from babbling on more! Do you think I’ve missed anything out? Or do you disagree? Has it been useful or do you think it’s a bunch of self-indulgent tosh? Please give me your feedback.

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Brilliant post. PS: I thought you guys charged the businesses who got listed on Unchained. Since you don’t, would you call yourselves more along the Craigslist model? What’s the long-term aim as far as sustaining Unchained is concerned?